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Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital

Published online by Cambridge University Press:  09 October 2009

Paolo Fulghieri  and
Merih Sevilir
Paolo Fulghieri
Affiliation:
University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Campus Box 3490, Chapel Hill, NC 27599. paolo_fulghieri@unc.edu
Merih Sevilir
Affiliation:
University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Campus Box 3490, Chapel Hill, NC 27599. merih_sevilir@unc.edu
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Abstract

This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 6 , December 2009 , pp. 1291 - 1321
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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